To calculate customer retention rate by using period method, we divide customers into three groups:
- Retained (“1”): customers who have sales in both the current period AND in any of the previous period;
- New (“0”): customers who have sales in the current period but do NOT have sales in any of the previous period;
- Not a Customer (“-1”): If a customer does not have sales in the current period, regardless of the past, we do not count it as a customer for that period.
Retention Rate = sum of the retained customers/ sum of retained and new customers. In EXCEL, =SUMIF(quarter, “=1”)/COUNTIF(quarter, “>-1”)
- Period retention is a more useful statistic than year-to-year retention. This is because of the nature of H’s customers: 95% of their customers are lawyers or law firms and they do not always have a need for H’s services in consecutive years, though they may return as future repeat customers when a new applicable case arises.
- All customers: “All customers” are treated as individuals even if they are lawyers operating within a larger law firm. A “Law Firm” is defined as any law firm with >1 lawyers.
- Law firms are retained at a much higher rate and also account for a much higher percentage of revenue than do all customers when viewed as individuals. This correlates with the revenue concentration chart which shows that revenue is highly concentrated in the top quartile of customers. By far, H’s customer retention and concentration by revenue are both highest in the top quartile of their customers.